This article has been written by Aman Kumar Pandey and Pawan Kumar.

This article has been edited and published by Shashwat Kaushik.

Introduction 

The real estate sector is among the widely acknowledged sectors. It is very crucial for the growth and development of the Indian economy, as it holds the second position in terms of employment generation after the agricultural sector in India. The real estate sector can be subdivided into four further sectors, which include retail, housing, commercial and hospitality.

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The tax structure that existed before the commencement of GST was filled with complexity, which included Value Added Tax (VAT), service tax, stamp duty, registration fees, and local body taxes. The complexity of the previous tax system caused inefficiency and cost burden on the real estate sector. The opaque structure cast a shadow on the transparency of the real estate sector, which reduced people’s faith in investing.

The Goods and Services Tax (GST) was implemented on July 1, 2017 by removing a complex and shattered tax structure for central as well as state taxes. In India, goods and services are classified into different tax slabs, such as 5%, 12%, 18%, and 28%, respectively.  Commodities that are essential in nature are generally exempt from GST, whereas gold and job work related to diamonds have a low rate of GST. A compensation cess is being levied on demerit goods and several luxury items.

GST affected the real estate sector to a great extent by reducing the prices of properties due to the reduction of tax rates. There was a further reduction of the tax rates, as the rate of GST till March 2019 for Affordable and Non-Affordable Residential Under-Construction Properties was 8% and 12%, respectively, with the benefit of Input Tax Credit (ITC), but the rates from April 2019 for Affordable and Non-Affordable Residential Under-Construction Properties were reduced to 1% and 5%, respectively, without ITC.

In this article, we have comprehensively discussed how GST has impacted the Indian real estate sector. 

Application of GST in Indian real estate sector 

Sale of land

As per Paragraph 5 of Schedule III of the Central Goods and Services Tax Act, 2017, the sale of land is neither a supply of goods nor a supply of services, so no GST will be applicable.

Sale of building

If there is a ready-to-move-in property along with the issuance of its completion certificate or the building obtains its first occupancy, or whichever is earlier, in that case, GST will not be applicable on the sale of the building.

For instance, a building is an under-construction commercial property for which one buyer made an advance payment to book one of the units under his own name. If the construction of that building is completed and the unit is transferred to the buyer, in that case, GST will be applicable to that building at the rate of 18%. Now, if any unit is being sold, the value of land and building will be included, and we cannot bifurcate the value of land and building separately.

GST is not applicable on the land because we have already paid the stamp duty on that land. The reason why the government has decided that whenever there is a sale of a building, GST will not be computed on the one-third value is based on the assumption that the one-third value (33% of the total value) belongs to the land, so it will be excluded from the computation. Suppose GST is applicable at the rate of 18%, then the one-third value of the land will be excluded, and the net GST liability will be at the rate of 12%. But such a methodology of excluding the value of the land from the total value of the building is not entirely justifiable because places where the value of the land is much higher than the structure or the building that has been constructed on that land will not serve the purpose of computing GST accurately on that building or will not be able to exclude the accurate value of the land for the computation of GST.

Affordable residential property

Metropolitan cities: If affordable residential housing property (under construction property) is located in metropolitan cities like Delhi (including the National Capital Region), Mumbai (including the Mumbai Metropolitan Region), Chennai, Hyderabad, Kolkata and Bangalore with a carpet area of up to 60 square metres and a purchase value of up to 45 lacs, then GST will be applicable at the rate of 1%, including projects that come under the scheme of Pradhan Mantri Awas Yojana (PMAY).

Non-metropolitan cities: If affordable residential property (under construction property) is located in non-metropolitan cities with a carpet area of up to 90 square metres and a purchase value of up to 45 lacs, then GST will be applicable at the rate of 1%.

NOTE: Any builder who indulges in the construction of such property is not entitled to avail the benefit of the Input Tax Credit (ITC).

In this article, we have further discussed what Input Tax Credit is and its implications for the Indian real estate sector.

If the builder purchases the raw materials for the construction of such property from the supplier, the GST charged by the supplier on such purchase cannot avail the builder of the benefit of ITC.

There is also one condition that 80% of the purchase should be from the registered supplier, and the GST would be applicable as per the GST rate of those materials, but in the case of cement, GST will be applicable at the rate of 28%. If the builder fails to follow the condition, then he will be liable to pay GST at the rate of 28% on all the materials on the Reverse Charge Mechanism.

Non-affordable residential property

In such properties, GST will be applicable at a 5% rate. Under Non-Affordable residential property also, builders cannot avail themselves of the benefit of ITC.

Rent

GST does not attract any rent collected from properties used for residential purposes by a registered person. But GST will be applicable at a rate of 18% if the property is rented out for some commercial purpose to a tenant who is a registered person. The landlord also needs to pay GST at the rate of 18% on the rent collected from the commercial property if he is a registered person.

According to Section 22 of the CGST Act, a person needs to register himself under GST if his aggregate annual turnover surpasses Rs. 20 Lakh in a financial year.

Maintenance charges

GST shall be applicable at the rate of 18% if the flat owners are paying at least Rs 7500 or more as maintenance charges and if the annual turnover of the housing society or Resident Welfare Association (RWA) is more than Rs 20 lacs. Both conditions should be fulfilled for the application of GST.

Housing societies and Resident Welfare Associations can avail themselves of ITC if they pay taxes on the purchase of capital goods such as generators, which are to be used in residential societies, goods such as sanitary or hardware items and even services like repair or maintenance.

Works contract services

A work contract has been defined under Section 2 (119) of the Central Goods and Services Tax Act, 2017. Works contract services are usually a combination of material and labour, which cannot be bifurcated as they are naturally bundled. In Paragraph 6 (a) of Schedule II of the Central Goods and Services Tax Act, 2017, work contract services have been considered a composite supply.

Whenever there are two or more supplies of goods and services in conjunction with each other and which are by nature in a bundle wherein one of the supplies is treated as a principal supply, it is known as a composite supply (Section 2 (30) of the CGST Act). Therefore, Works Contract Services is a composite supply wherein both material and labour are included and cannot be supplied separately.

According to the general rule of Section 17 (5) (c) of the CGST Act, when works contract services are provided by the contractor with respect to the construction of an immovable property (excluding plant and machinery), the builder or developer cannot avail the benefit of ITC. But if the input service is used by the contractor for further supply of works contract service, the contractor can avail of the benefit of ITC.

Likewise, as per the general rule of Section 17 (5) (d) of the CGST Act, goods or services (or both) used with respect to the construction of an immovable property (excluding plant and machinery) by a taxable person for his own use cannot avail the benefit of Input Tax Credit. But the benefit of ITC can be availed of by the contractor if such goods, services or both are used in the course of business or for further business purposes.

Input Tax Credit (ITC)

ITC, a core feature of GST, empowers businesses to offset the GST they have already paid on inputs against their final GST bill. ITC eliminates the dreaded “tax-on-tax” domino effect, ensuring that only actual value added is taxed at each stage.

The term ITC has been defined under Section 2(63), which is a critical element of GST; it allows businesses to set off the taxes they have already paid at the time of purchase against the final tax invoice. This mechanism completely eliminates the previous tax system’s cascading effect, which benefits both businesses and customers.

If a manufacturer pays a tax of Rs 30,000 on his product, and if he has already paid a sum of Rs 25000 as input tax for the purchase of raw materials that were used for the production of the product, then he only needs to pay Rs 5,000 to the government as output tax.

The provisions for ITC have precisely been highlighted under Sections 16 to 21 of the CGST Act 2017.

  • Section 16 deals with who is eligible to claim ITC under the given conditions and what is the time prescribed to claim ITC.
  • Section 17 specifies the goods or services that are used for both business and non-business purposes or in the case of taxable and non-taxable supplies. It also provides a list of items that are ineligible for ITC.
  • Section 18 talks about special incidents where ITC can be claimed.
  • Section 19 deals with the rules of ITC related to job work.
  • Sections 20 and 21 specify the provisions of ITC regarding input service distributors.

Earlier in the real estate sector, developers could potentially save on taxes by taking advantage of ITC, but in the 34th meeting of the GST Council, it was decided that builders or developers cannot avail of the benefit of ITC under the new tax rates for the real estate sector.

Comparative study

As we have so far discussed regarding the significant impact of GST on the real estate sector in India. Therefore, it becomes necessary to compare the GST real estate tax regime with any country, so in this article, we have compared it with Australia because it is one of the developed nations that follows the GST tax system.

Through this analysis, we can get a broad and diversified idea about the GST regime that is being followed in both countries. In India, we follow a dual GST model in which the GST gets divided between the central and the state, whereas, in Australia, it is the responsibility of the Australian tax office to collect the GST and then distribute it to the states.

We can say that even though India and Australia have different approaches to their GST regimes, which may vary, both countries aim to increase their economic growth by enhancing their tax efficiency. There is a lot that both countries can learn from each other.

There is a federal system that is being followed in both countries, where the centre and the state share taxation responsibility. Along with this, both countries have the potential for economic growth in the upcoming years. These similarities make the GST comparison between both nations more relevant.

In India, GST was introduced a few years ago, in 2017, whereas in Australia, it has been implemented since 2000. With India having a multi-tiered GST system for different goods and services, the tax slab of India includes rates of 5%, 12%, 18%, and 28%. On the other hand, Australia only has a single GST rate, i.e. 10% for all goods and services. In India, the goods and services which are exempted from GST fall under a single list that is being provided through Notification No. 12/2017- Central Tax and are being treated in the same manner, but in Australia, goods and services exempted from GST fall either in the category of GST-free or Input-taxed and are being treated accordingly.

The main objective behind this analysis is that we can discuss the real estate GST regimes of both countries. In fact, both the Indian and Australian GST regimes have certain flaws that need to be addressed and can potentially look after each other’s GST regimes:

  • In Australia, a GST of 10% applies to all commercial properties for the purpose of sale (according to Division 40), whereas the GST regime in India for commercial properties is 18%. Lowering the GST rates in India on the sale of commercial property can encourage the construction of more commercial property, which can lead to an increase in the economic growth of the country.
  • In India, the GST structure does not allow developers or builders to claim the benefit of ITC, whereas, Australia has a very smooth mechanism for claiming ITC, which helps to lower the construction cost and provide the property to the customers at a lower price.
  • In Australia, the current rate on the sale of newly constructed residential properties is 10%, which is relatively high as compared to the Indian tax regime, which is 1% and 5% for affordable and non-affordable residential properties, respectively, that are under construction. Reducing the rates can help to reduce the price of the property and provide it at a more affordable rate to the buyers.

Both countries can make their GST regime more effective for the real estate sector by learning from each other and working on the potential areas that require improvement.

Disputes or challenges

Disputes or challenges with respect to Input Tax Credit (ITC) normally arise when the authority denies claiming ITC due to any discrepancies in documentation, non-compliance with GST rules or classification issues. There is a case that addresses the same issue related to ITC.

M/S Safari Retreat Private Limited & Anr. vs. Chief Commissioner Of Central Goods And Service Tax & Ors.

Facts of the case

In this case, the petitioner is indulged in carrying on the business of constructing shopping malls to let out to multiple tenants and lessees. Materials and other inputs in the form of cement, sand, steel, aluminium, wires, lifts, escalators, air conditioning plants, etc. were purchased by the petitioner in large quantities and services in the form of consultancy services, architectural services, legal and professional services, etc. were received by the petitioner for the construction of the shopping mall. All these goods, as well as services that were used for the construction, are taxable under the CGST Act and SGST Act (The Odisha Goods and Services Tax Act, 2017), and therefore, the petitioner had to pay a huge amount of GST and accumulated ITC of Rs. 34,40,18,028/- on the purchase of such goods and the services availed. To utilise the ITC to set off the CGST and OGST liabilities, which were payable on the rents received by the petitioner from the tenants, approached the revenue authority in this regard. However, the revenue authority told the petitioner to deposit the CGST and OGST without utilising ITC by relying on the restrictions placed under Section 17(5)(d) and also told the petitioner about the penal consequences if it did not do so. So, the petitioner ended up paying a huge amount of CGST and OGST.

Issues raised in the case

Whether the petitioner can avail of the benefit of ITC that has been accumulated on the purchase of inputs for the construction of the shopping mall that is intended to be let out?

Arguments put forth

From the petitioner’s side

  • The objective of the CGST Act was to avoid the cascading effect of numerous indirect taxes.
  • As per Section 16 of the CGST Act and OGST Act, the petitioner, being a registered person, is entitled to avail the benefit of the ITC, which is accumulated on the purchase of inputs and services availed for the construction of the shopping mall intended to be let out.
  • The consequence of denying the benefit of ITC would be an inevitable increase in the cost that the consumer has to bear at the end of the day and ultimately render the building uncompetitive compared to previously existing similar built-up units, which would also be violative of the fundamental right of the petitioner to carry on a business that is enshrined under Article 19(1)(g) of the Constitution.
  • There will be a fresh stream of GST revenues for the government from the rents generated by the building. The denial of input credit in such a situation would be completely arbitrary, oppressive and unjust. It would directly oppose the prime objective of GST itself.
  • The denial of ITC with respect to a building that is intended to be let out would be considered treating it like a building that is intended to be sold. Treating these two types of buildings like one for the purpose of GST is contrary to the fundamental principles regarding the classification of subject matter for the tax levy and, hence, violative of Article 14 of the Constitution.
  • To allow ITC to a builder who sells a building pre-issue of completion certificate while denying ITC to a person like the petitioner is clearly arbitrary and discriminatory.
  • A narrow interpretation of Section 17(5)(d) of the CGST and OGST Act leads to double taxation, first on the inputs used for the construction of the shopping mall and second on the rental income generated by the same mall.
  • The interpretation of Section 17(5)(d) of the CGST Act and OGST Act leads to a conclusion that, as per the circumstances of the present case, the petitioner is not entitled to avail ITC while paying CGST and OGST on rent received from multiple tenants of the shopping mall without breaking the tax chain, which patently goes against the intention of the Legislature and frustrates the objective of the Legislature for enacting the CGST Act and OGST Act.
  • The shopping mall that the petitioner is constructing is not “intended for sale,” not even “on his own account,”  but “intended for letting out.”

From the respondent’s side:

  • The taxpayer cannot claim ITC without any authority under the law. Restrictions to avail the benefit of input credit accrued under the current law are reasonable and equally applicable to taxpayers. Rule or Act can not be changed or amended as per the suitability of the taxpayer, which usually differs from person to person.
  • The taxpayer must adhere to the restrictions that are prescribed under Section 17(5)(d) of the CGST or OGST Act since the taxpayer cannot challenge such restrictions by saying they are violative of their fundamental rights enshrined under Articles 14 and 19(1)(g) of the Constitution.
  • The petitioner is omitting the conditions and restrictions that are prescribed for registered taxpayers while interpreting the provisions of Section 16. Under CGST or OGST Act and Rules framed there, it is stated that the Registrant should follow the Act and Rule only to the degree of their suitability.
  • The taxpayer cannot avail of the credits accrued due to the supply of goods and services in the form of inputs used to construct the shopping mall as a vested right for paying the GST on the rent collected, which is an output taxable supply from the said property.
  • Restricting the flow of ITC also exists under Section 16(1), which authorises the Central Government to impose restrictions and conditions on taking advantage of input credit, which showcases the intention of the legislation that ITC may not always be allowed, either partially or fully. ITC has been denied for some transactions under Section 17 of the CGST and OGST Act. So, in order to allow flexibility, the Act provides for imposing such conditions and restrictions on the availability of input credit.
  • In the previous tax regime, input credits were available for the final product with regard to only certain taxes or duties. In the entire supply chain, GST is only applicable to value addition and, therefore, avoids the cascading effect of indirect taxes. So, under the erstwhile tax regime, less ITC was available to taxpayers along the entire supply chain than in the present GST regime. The transitional provisions under the GST provide adequate input credit for taxes accrued in the previous tax regime to all the taxpayers in the present GST regime.
  • Certain conditions and restrictions mentioned under Section 17(5)(d) of the CGST Act prescribe the denial of input tax credit to a particular class of taxpayers, which means that the legislation, under its wisdom, has decided that the input tax credit of taxes that can be availed of as ITC and the taxes where ITC cannot be availed “as policy call of the government,” which has been given effect through legislation, cannot be attained through judicial review.

Judgement of the Court

The Honorable Orissa High Court, while considering the case and the provisions of Section 17(5)(d) of the CGST and OGST Act, 2017, held that the narrow interpretation that has been adopted by the department frustrates the objective of the Act and is not required to be accepted since the petitioner has to pay the huge amount without any reason. Since the petitioner is using the property to let out on which he is covered under GST and not using it for his own purpose, even then, he is paying a huge amount of GST for which he is not accountable. If the petitioner is required to pay GST on the rental income arising from the investment on which he has paid GST, he can avail of the input tax credit on the GST. Further, the court did not accept the prayer to hold the provisions of Section 17(5)(d) of the CGST Act to be ultra vires. 

Present status of the case

The Department has preferred an appeal before the Hon’ble Supreme Court of India against the judgement given by the Hon’ble Orissa High Court. Presently, the Apex Court has reserved the judgement (Civil Appeal No.- 2948/2023 & Date of Order-12/10/2023).

Indian laws for real estate sector

The Indian real estate sector is a complex and ever-evolving landscape, governed by a number of laws and regulations. These laws aim to protect the interests of buyers, sellers, and investors and to ensure the smooth functioning of the sector.

Key laws governing the real estate sector in India include:

The Real Estate (Regulation and Development) Act, 2016 (RERA)

This landmark legislation was enacted to address the rampant malpractices in the real estate sector in India. It establishes a Real Estate Regulatory Authority (RERA) in each state, which is responsible for registering and regulating real estate projects. RERA aims to protect the interests of homebuyers by ensuring that developers disclose all relevant information about their projects, including project plans, construction timelines, and financial details. It also provides homebuyers with a grievance redressal mechanism in case of any disputes with developers.

The Transfer of Property Act, 1882

This law governs the transfer of ownership of immovable property in India. It provides a legal framework for the sale, purchase, and gifting of property. The Act sets out the formalities required for a valid transfer of property, including registration of property documents and payment of stamp duty. It also protects the rights of buyers and sellers by providing for remedies in cases of breach of contract or fraud.

The Indian Contract Act, 1872

This law governs contracts in India, including contracts for the sale and purchase of real estate. It provides a legal framework for the formation, terms, and enforcement of contracts. The Act sets out the essential elements of a valid contract, including offer, acceptance, consideration, and legality of purpose. It also provides for remedies in cases of breach of contract, such as damages, specific performance, and injunctions.

The Land Acquisition Act, 1894

This law provides for the acquisition of land by the government for public purposes, such as infrastructure projects, housing, and urban development. The Act sets out the procedure for land acquisition, including the process of notification, compensation, and rehabilitation of affected landowners. It also provides for the rights of landowners in the event of compulsory land acquisition, including the right to fair compensation and the right to challenge the acquisition in court.

The Environment Protection Act, 1986

This law aims to protect the environment and prevent environmental pollution. It imposes restrictions on the development of land in ecologically sensitive areas and requires developers to obtain environmental clearances before commencing construction. The Act also provides for the regulation of air and water pollution, hazardous waste management, and the conservation of forests and wildlife.

The Benami Transactions (Prohibition) Act, 1988

This law prohibits benami transactions, which are transactions where the real owner of a property is different from the person whose name appears on the property documents. The Act aims to prevent the use of benami transactions for illegal purposes, such as tax evasion and money laundering. It provides for the confiscation of benami properties and penalties for individuals involved in benami transactions.

These are just a few of the many laws that govern the real estate sector in India. It is important for buyers, sellers, and investors to be aware of these laws and to comply with them in order to protect their interests and avoid legal complications.

In addition to the above laws, there are also a number of state-specific laws and regulations that govern the real estate sector. These laws may vary from state to state, so it is important to be aware of the laws applicable in the state where you are buying, selling, or investing in real estate.

The Indian real estate sector has witnessed significant growth in recent years, and this growth is expected to continue in the coming years. However, the sector is also facing a number of challenges, such as the high cost of land, the shortage of affordable housing, and the need for better infrastructure. To address these challenges, the government has taken a number of steps, such as introducing RERA, providing subsidies for affordable housing, and investing in infrastructure development.

The Indian real estate sector is poised for continued growth in the coming years. By being aware of the laws and regulations governing the sector, buyers, sellers, and investors can protect their interests and take advantage of the opportunities that the sector offers.

Conclusion

The tax structure that existed before the commencement of GST was filled with complexity, which caused inefficiency and a cost burden on the real estate sector. There was a need for a new tax structure and eventually, we got GST, which was implemented on July 1, 2017 by removing a complex and shattered tax structure. The introduction of GST affected the real estate sector to a great extent.

Previously, in the real estate sector, developers could save on taxes by availing of the benefit of ITC, but in the 34th meeting of the GST Council, it was decided that builders or developers cannot take advantage of ITC under the new tax rates.

Further, we have analysed the implications of GST, especially in the real estate sector of India and Australia, where we got a broad idea about the GST regime that is being followed in both countries. Both countries follow a federal system, wherein the centre and the state share taxation responsibility. Moreover, we have also discussed that the GST regime of both countries has certain flaws that need to be addressed and can be improved by looking at each other’s tax structures.

We have also analysed a case wherein the issue involved was whether the petitioner could avail of the benefit of ITC that has been accumulated on the purchase of inputs for the construction of the shopping mall that is intended to be let out. Wherein the Hon’ble Orissa High Court ruled in favour of the petitioner. The opposite party preferred an appeal in the Hon’ble Supreme Court of India. But the Supreme Court has reserved the judgement.

References

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